2024 (11) TMI 617 - HC - SEBI

Proceedings against executive director for the alleged fraudulent activities of the company - as argued petitioner had tendered resignation and resigned from the said Amrit Projects Limited and all its group of companies in the year 2013 - HELD THAT - An executive director is a senior-level executive responsible for the overall management and leadership of an organization. The executive director reports to the board of directors and is responsible for setting the strategic direction for the organization, overseeing day-to-day operations, and ensuring the organization s goals and objectives are met. Executive directors are appointed by the board and in this case as submitted by Mr. Ganguly, appearing for the SEBI, that the petitioner herein was also a member of the Board of Directors. As petitioner submits that the petitioner was only an executive director and received only a salary of Rs. 25,000/- and he was not involved in any of the day-to-day affairs of the company and he has, thus, prayed for quashing of the proceedings against him. It is not denied by the petitioner that he was an executive director of the company herein and a member of the Board of Directors as stated by the opposite party during the period of the alleged offence in the present case. A prima facie case has also been made out before the whole time member of the SEBI against the petitioner and others. Thus, the petitioner was prima facie a member of the Board of Directors (subject to being proved otherwise during trial), during the period of alleged offence and a prima facie case against him was also found, as held by the whole time member of the Securities and Exchange Board of India. Considering the fact that there is a prima facie case against the petitioner, it will be a clear abuse of the process of law, if this Court interferes in the proceedings before the trial Court against the petitioner herein. On perusal of the order of the learned Special Judge, the learned Judge has rightly applied the appropriate provisions of law in deciding the prayer for discharge and the said order being in accordance with law requires no interference by this Court. The trial before the Special Judge is at the stage of evidence and one witness has already been examined, wherein the petitioner has also participated.

Summary

Issues Involved:

1. Whether the petitioner, as an executive director, can be held liable for the alleged fraudulent activities of the company.
2. Whether the proceedings against the petitioner should be quashed based on his role and responsibilities within the company.
3. The applicability of vicarious liability under the SEBI Act and the Companies Act in relation to the petitioner's position.

Detailed Analysis:

1. Liability of the Petitioner as an Executive Director:

The core issue revolves around whether the petitioner, who served as an executive director of Amrit Bio Energy and Industries Limited, can be held liable for the company's alleged fraudulent activities. The petitioner was appointed as an executive director on April 27, 2004, and resigned on October 8, 2013. The alleged offenses occurred during the financial years 2007-2011, within the petitioner's tenure. The court noted that a company, being a juristic person, acts through its officers; hence, those responsible for the company's conduct at the time of the offense may be held liable. The court emphasized that liability arises from being in charge of and responsible for the company's business conduct at the relevant time, not merely from holding a title.

2. Quashing of Proceedings Against the Petitioner:

The petitioner argued for the quashing of proceedings, claiming he was not involved in the day-to-day affairs of the company and only received a salary of Rs. 25,000. However, the court found a prima facie case against the petitioner, as he was a member of the Board of Directors during the period of the alleged offense. The court referenced precedents, such as S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla, which clarified that only those in charge of and responsible for the company's business at the time of the offense could be held liable. The court concluded that the petitioner's long tenure as director and the prima facie evidence supported the continuation of proceedings.

3. Applicability of Vicarious Liability:

The judgment discussed the principles of vicarious liability under the SEBI Act and the Companies Act, focusing on the petitioner's role. It cited various Supreme Court judgments, including K.K. Ahuja v. V.K. Vora, which outlined that a director could be held liable if they were in charge of and responsible for the company's business when the offense occurred. The court determined that the petitioner's role as an executive director and board member during the relevant period justified the proceedings against him. The court also noted that the trial stage, involving evidence examination, was not appropriate for quashing the proceedings based on the petitioner's claims.

Conclusion:

The court dismissed the revisional application, affirming that there was a prima facie case against the petitioner. It held that interfering with the trial proceedings would be an abuse of the process of law. The trial was directed to proceed expeditiously, with the court emphasizing the need for evidence to determine the petitioner's actual involvement and responsibility. The judgment underscores the legal principles of vicarious liability and the need for evidence to substantiate claims of non-involvement in corporate offenses.